The Bank of Spain will demand 7,500 million more from the banks in the midst of BBVA's takeover bid for Sabadell

For the first time since the mechanism was launched a decade ago, the Bank of Spain has decided to activate the banking countercyclical buffer, and it has done so in advance.

Oliver Thansan
Oliver Thansan
15 May 2024 Wednesday 22:26
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The Bank of Spain will demand 7,500 million more from the banks in the midst of BBVA's takeover bid for Sabadell

For the first time since the mechanism was launched a decade ago, the Bank of Spain has decided to activate the banking countercyclical buffer, and it has done so in advance. This measure allows resources to be saved in good times like the current one to use them when the situation worsens.

The percentage of this cushion on capital reserves was until now 0%. The institution will raise it by half a point in the fourth quarter of 2024 for its application as of October 1, 2025. That year it will be raised again by another half point, for its application in 2026, which would force the bank to accumulate some 7.5 billion euros in just two years.

This effort occurs in the midst of BBVA's takeover bid for Sabadell and also coincides with the application of the special tax on banks introduced with the rate increases after the war in Ukraine. The special tax aims to raise about 3,000 million euros in two years.

The new requirement only applies to assets in Spain. One percentage point of cushion on banking assets is equivalent to about 15,000 million euros. The impact figure, according to calculations by the Bank of Spain, is close to half of this amount, that is, about 7.5 billion.

In the case of BBVA, which has just launched a takeover bid for Sabadell, its assets in Spain are 121,779 million euros, so that this 1% implies a requirement of 1,217 million, as deduced from its 2023 annual report. .

The measure may have an impact on the distribution of dividends, at a time when both BBVA and Sabadell are competing to attract the shareholders of the Catalan bank after the takeover bid announced last week.

“We are going to do it gradually, 1% will only be required in the last quarter of 2026,” stated the governor of the Bank of Spain, Pablo Hernández de Cos, when presenting the measure before the press and when asked about the effect of the measure on the dividend. The benefits, he has said, will be “positive” in the long term.

“It is very difficult to get the risks right and anticipating them is necessary,” he stated. The countercyclical capital buffer (CCA) is reviewed every quarter and consists of a percentage of the ECB's capital requirements. By being released in earlier phases, it offers “more releasable capital in adverse cyclical conditions, which would help sustain the flow of credit to the real economy during them and contribute to the objective of macroeconomic stabilization.”

“For a few quarters we have been announcing the review of this framework,” said the governor of the Bank of Spain. The decision has been made, but it must still undergo a public consultation procedure.

The novelty is that the Bank of Spain has anticipated when applying this mechanism, since the risks in sight are not so high. Portugal has just approved a similar decision regarding this buffer, which was created a decade ago, with the Basel III standards.

“From the previous situation in which we only activated the buffer when the risks were high, now we are going to move to a level in which it is activated when the risks are standard,” stated the governor of the Bank of Spain.

Hernández de Cos has indicated that the current risk of Spanish banks is “intermediate”. “We are not at a high level” and “we are going to do it gradually so that the entities have time to prepare.”

The buffer that has been activated only applies to the part of the banks' balance sheet corresponding to the Spanish market. The Bank of Spain estimates that local business is equivalent to 50% of assets.

The Bank of Spain recognizes that, when applied to assets at the local level, the effort requested will be greater for banks with greater exposure to the country.

Santander or BBVA have a greater international presence and, therefore, mitigate the impact. It can also be seen from the opposite side. The banks most present in the local market “are also more protected against a shock,” indicates the Bank of Spain.